South Carolina Tax Com'n v. South Carolina Tax Bd. of Review, s. 0461

• Decision Date: 16 October 1984
• Docket Number: Nos. 0461,0540,s. 0461
• Citation: 339 S.E.2d 131,287 S.C. 415
• Court: South Carolina Court of Appeals
• Parties: SOUTH CAROLINA TAX COMMISSION, Appellant, v. SOUTH CAROLINA TAX BOARD OF REVIEW, Baker and Baker, David Baker, Lee J. Baker, Deborah Ann Baker, Kenneth E. Baker, Frank W. Baker, John D. Baker, Dale A. Baker, Gail B. Anastasion, Janna B. Creech, and Laurie A. Baker, of whom Baker and Baker, David Baker, Lee J. Baker, Deborah Ann Baker, Kenneth E. Baker, Frank W. Baker, John D. Baker, Dale A. Baker, Gail B. Anastasion, Janna B. Creech, and Laurie A. Baker, are Respondents. . Heard

Page 131

339 S.E.2d 131

287 S.C. 415

SOUTH CAROLINA TAX COMMISSION, Appellant, v. SOUTH CAROLINA TAX BOARD OF REVIEW, Baker and Baker, David Baker, Lee J. Baker, Deborah Ann Baker, Kenneth E. Baker Frank W. Baker, John D. Baker, Dale A. Baker, Gail B Anastasion, Janna B. Creech, and Laurie A. Baker of whom Baker and Baker, David Baker, Lee J. Baker, Deborah Ann Baker, Kenneth E. Baker, Frank W. Baker, John D. Baker Dale A. Baker, Gail B. Anastasion, Janna B. Creech, and Laurie A. Baker, are Respondents.

Nos. 0461, 0540.

Court of Appeals of South Carolina.

Heard Oct. 16, 1984.

Decided May 7, 1985.

On Petition For Rehearing Aug. 21, 1985.

T. Travis Medlock, Atty. Gen., Retired Atty. Gen. Daniel R. McLeod, Deputy Atty. Gen. Joe L. Allen, Jr. and Asst. Atty. Gen. Ronald W. Urban, Columbia, for appellant.

Steven M. Anastasion of Callison, Tighe & Rush, Columbia, for respondents.

J.D. Todd, Jr. and Jack H. Tedards, Jr., of Leatherwood, Walker, Todd & Mann, Greenville, amicus curiae.

GARDNER, Judge:

The respondent Baker and Baker (Baker) ¹ is a South Carolina general partnership which owns an office building in Columbia, S.C. Approximately 61 percent of the net rental space of the building is leased by long-term leases to a utility and for this reason the property was appraised for ad valorem taxes by the South Carolina Tax Commission. All parties admit that the utility leases were entered into at arms length and that the rental was fair and reasonable when the property was leased. The South Carolina Tax Commission appraised the property for 1980 ad valorem taxes as having a fair market value of $2,330,000. This appraisal gave no consideration to the existing contract rents of the leases. Baker appealed the appraisal. An administrative hearing was first held by the Commission at which time testimony of the Bakers and experts for both sides was taken. The Tax Commission then reduced its appraisal to $2,030,000. The Bakers then appealed the decision to the Tax Board of Review, which ruled that the fair market value of the property for purposes of appraisal for 1980 ad valorem taxes was $1,596,500. On appeal to the Court of Common Pleas, the decision of the Tax Board of Review was affirmed. We agree and affirm.

The appraisals submitted by the parties at the administrative hearing employed the usual and customary methodology in arriving at the fair market value of the subject property, i.e.: the income or capitalization approach, the replacement value approach, and the market data or comparable sales approach. The controversy between the parties results from the weight and effect given to the leases encumbering the subject property in determining its fair market value.

The sole issue on appeal is whether the Tax Board of Review erred by using the contract rents of the leases in valuing the leased property under the income or capitalization of income method of evaluation.

This decision is necessarily founded in the statutory law of this state. Authorities of other states are divided, largely because of variances in statutory law.

To understand this case, the reader must have at least a rudimentary understanding of the income or capitalization of income approach to appraising property.

The income or capitalization of income approach to appraising property is, in the last analysis, a process whereby the appraiser assumes that a purchaser of or investor in commercial real estate buys the real estate with the expectation of earning an annual percentage of the purchase price (capital investment) of the commercial property. If the property is commercial and under long-term lease, the net annual rental (assuming a depreciation factor consistent with replacement of the property at the end of the lease or the retained value thereof) is divided by the desired yield on the capital investment. The formula is: net annual rental / required yield (such as 12 percent) = the purchase price. As an illustration, suppose an investor considers buying commercial property offered for sale and that the property is leased for a ten-year term for $16,800 net income per year and would retain its present value during the term of the lease; suppose further that the investor expected a yield of 12 percent per annum. Under this hypothetical proposition, when appraised under the capitalization of income approach, the investor would believe the property to be worth $140,000, which is the quotient of dividing $16,800 by .12 ² The Tax Commission argues that present day rental value, rather than the rentals provided by the leases encumbering the property, should have been used in appraising the property under the capitalization of income approach. We reject this argument as being impractical and unrealistic. Even the Tax Commission appraiser at the administrative hearing conceded that if he were advising a purchaser about the fair market value of the subject property, the existing leases or contract rents encumbering the property would have to be taken into account. People in the market place deal with the realities of the moment when they invest their money. The evidence of record shows that in making offers to purchase commercial property on the open market, investors consider long-term leases encumbering the property. And, it is the market place value of the real property which determines its value for ad valorem taxes. Section 12-37-930, Code of Laws of South Carolina (1976), provides:

Section 12-37-930. Valuation of property.

All property shall be valued for taxation at its true value in money which in all cases shall be held to be the price which the property would bring following reasonable exposure to the market, where both the seller and the buyer are willing, are not acting under compulsion, and are reasonably well informed as to the uses being used. Provided, however, that acreage allotments or marketing quota allotments for any commodity as established under any program of the United States Department of Agriculture shall be classified as incorporeal hereditaments and the market value of any real property to which they are attached shall not include the value, if any, of such acreage allotment or marketing quota.

We hold that under this statute there is no valid distinction between market value for sales purposes and market value for taxation purposes.

We also hold that the language of the above statute provides the answer to the question presented this court: all property must be valued at its "true value in money" which is defined to be the market value between a willing buyer and seller.

In determining the market value of income producing commercial real estate, we hold that the contract rent of long-term leases entered into at arms length and at a fair rental at the time is one of the determinative factors of the market value of property.

The Tax Commission...